Thursday, November 16, 2006

Can an increase in GST help the poor?

Imagine a 'poor' family who does not pay any income tax now.And it spends, say $1050 a month on all purchases of goods and services (for which it is currently paying $50 in GST).

When GST rises to 7%, it would be paying $1070 a month for these purchases.So, that is $20 more.Now how does an increase in GST help the 'poor'?

Contrast that with the 'not-so-poor', who currently pays some income tax.The GST increase would be timed with cuts in corporate tax rates.And to minimise any loopholes, similar cuts in personal income tax rates would also be implemented.So, the 'not-so-poor' would enjoy a lower personal income tax rate when GST goes up.

If a 'not-so-poor' household has an annual income of $100,000, a 2% cut in personal income tax rate would make it $2,000 'richer' a year.But, to work out if they are 'better/ worse off' than current, they will have to offset this against the increase in 2% GST.

The 'break-even' consumption for him to be 'worse off' under the new tax regime is if his annual consumption is $100,000 (ie $2,000/ 2%).Since the household only earns $100,000 a year, it is not possible for them to spend more than $100,000 (housing mortgages aside).So, it seems the 'not-so-poor' will benefit, at the expense of the 'poor'.

Unless, of course, the price levels fall by 2% or so, so that the total price after GST increase remains the same.But, our CPI had been hovering at about 1% each year.What scope is there that price levels would go down by 2%?

Since there are indications that the 7% figure is not the final one, it is time for the government to consider implementing different GST rates for different goods and services.In the UK, eg, VAT has three rates - 17.5%, 5% and 0%.The reduced rates apply to things like domestic fuel and children's car seats, etc.Zero-rated items are what would be considered essential items like food, medicines. Full lists here and here.

Australia is another country that implements zero-rated GST for its 'essentials' like food.And perhaps due to such measures, it has a lower cost of living than Singapore.In a report by the UBS recently, Singapore's food and household appliances were surprisingly more costly than Sydney's.Although people in Sydney pay more tax than people in Singapore, and price levels are generally higher, Sydney's purchasing power was found to be higher than Singapore's.I'd extracted bits of the report and posted it here as I had some trouble posting the table here in blogspot.In the table, I'd used Sydney's prices as 100 where appropriate to facilitate comparisons across Singapore, KL, HK and Mumbai.

To soften the impact of the increase in GST, the Government will be implementing some offset 'Packages' (eg Economic Re-structuring Package, etc).However, these will disappear after a few years while the increased GST will continue.A more 'poor-friendly' package would be to implement differential GST rates.

Continue to raise GST for non-essential items by all means.But, unless we have different rates of GST, a GST increase cannot be helping the 'poor'.Technorati: GST increase

Okay, I can easily think of a simple method that will make this GST hike help the poor. It all lies in the great big mysterious unknown offset package.

Suppose the offset package will supplement monthly the poor by, say, giving those households which earn less than $3000 a month with a sum of $X, where X = (3000 - salary) / 3. So, e.g.

Salary / Supplement$600 / $800$1500 / $500$2100 / $300$1000000 / $0

Of course there's those unemployed and working part-time to consider, but those are details. Well, you get the idea: it is possible for the hike to help the poor. It all depends on the offset package. Which is why I hold the stand of not judging the hike until the details of the package are out.

As they say, death and taxes are the only two sure things in life.While everyone should expect to pay some tax, I believe the rich should pay more than the poor. Question is how much more.

As it is, Singapore's tax rates are one of the most competitive around. As for HK, people go to HK not because of their low taxes, but because it is at the doorstep of China. No amt of lowering our taxes can entice people to locate here if it was China they were eyeing.

It wld be sad if an idea is not taken up just because it did not originate from the govt. Then, it wld go against the call by govt for its citizens and the opposition to be 'constructive' and not simply criticise.

Then, everyone will have every reason to continue to criticise and not bother to suggest solutions. Hmm... This may not be a bad idea because criticising is so much easier!:-)

Yes, agree with you the offset package can be significant for the 'poor'.

The difference between having a significant offset package and a differentiated GST package is that the offset package is once-off. While the offset package can be phased over a few years, once this package ends, the 'poor' wld then end up paying the higher taxes.

Maybe we are jumping the gun. Perhaps govt can come up with a very innovative offset package that runs for eternity. :-)

Just because my blog has been viewed 312 times in the last fortnight or so, LKY got his ISD agents living and operating in the flat above mine to vandalise my fridge spoiling all the food in the freezer, about $100 worth or so. By now, my aircon, electric typewriter, fax machine, computer hard drives, DVD players, etc, etc, have been vandalised costing me more than $2,000 in repairs/replacements.

These vandalism attacks are not new and have been ongoing for 15 years. I have long documented these in soc.culture.singapore. To know more, if you are interested, do a search there using the search term... RH: LKY crimes... Or visit my blog above, which details proofs that LKY rigged the Cheng San GRC election in 1997. I have 2 eyewitnesses to this sordid deed. That is why Cheng San disappeared from the electoral map after 1997. LKY lost there and could not afford to contest it ever again.

The devil in the implementation of the offset packages is in the details.

The implementation of the GST increase is an economic tsunami that hits all the lower income.

The problem, as we see with the progress packages and CPF top-ups etc is that targetting them is a challenge. Do we use income (based on income taxes/cpf contributions) or do we use residential dwelling place or a combination of both to determine where do we draw the line of who qualifies as the "lower income" group. The drawing of this line is very challenging and no matter how precise will not fully and efficiency offset the increase in GST of those hit. Therein lies one of the problems.

Targeting those that need help is always a problem because a bureaucracy is not designed to handle exceptions. Exceptions have to be decided on a case-by-case basis and someone has to be responsible for taking those decisions.

Perhaps people are not looking for govt to fully offset the impact of the GST increase. Perhaps the fundamentals of the system are what people are concerned with. If the fundamentals are 'fair' and 'equitable' and the authorities are seen to be implementing it in a 'fair' way, there would be less unhappiness. There is then no need for any offset packages if the 'poor' are not hit in the first place. :-)

If in practice, the policy is implemented effectively such that almost all lower-income families that deserve the offset package receives it, then the policy is sound and does live up to its intended purpose.

The keyword here is 'intended'. Very often, politicians emphasise the intention of the policy rather than the implementation of the policy.

What works in theory may not necessarily work in practice.

Like Milton Friedman said before, we should measure a policy's worth by its results after implementation, rather than by its intention before implementation. If the policy fails in practice, then the theory fails too.

Since the real world is so complicated, there will always be exceptions. If so, I would rather these 'anomalies' appear on a list of items (of which item attract what GST rate) rather than on a list of 'people' (of who gets to receive some or none of the offset package).

Yes, it is easier to implement a list of 'items' rather than a list of 'people'. The government just has to accept that the list of necessities exempted from the GST increase will be freely available to the middle and higher income families and not just the low-income families.